Unilever Wants to Filter China's Air Before It's Cleaned Up

(Bloomberg) -- As urban China was cloaked in smog two years ago, Unilever saw a business opportunity. The company that had perfected its approach to cleanliness and convenience -- think Dove soap and Knorr instant soups -- bought an air-purifying business, aiming to help Chinese consumers cut through the toxic cloud.

The acquisition of Blueair, a Swedish maker of gently whirring purifiers that strip living spaces of airborne pollutants, seemed like a forward-looking extension of the Anglo-Dutch company’s business approach, which it describes as doing well by doing good. If “sustainability” could help sell food and unguents, then why not appliances, too?

Unilever Wants to Filter China's Air Before It's Cleaned Up

“Just because you have a portfolio that’s good and right today does not guarantee you success five years from now,” Nitin Paranjpe, the London-based Unilever executive who oversaw the acquisition, said in an interview. “All businesses need to start developing a point of view -- what will the world in 10 years look like?”

There’s just one problem for Unilever as it contemplates the future in China: Since the purchase of Blueair, the air’s stopped getting worse. Growth in sales of air purifiers has slowed and competition has risen. That creates potential hurdles for Unilever’s portfolio revamp -- and for Paranjpe, who’s considered a candidate to succeed Chief Executive Officer Paul Polman.

As growth slows for mainstream consumer brands, the Hellmann’s mayonnaise maker has led industry giants like Nestle SA and Procter & Gamble Co. into new areas in a quest for faster growth. Recent acquisitions include Dollar Shave Club, which sends razor blades to subscribers’ homes, and Seventh Generation, which makes eco-conscious diapers and detergent. If the air-purifier market’s boom years are behind it, Blueair would be a rare and costly example of Unilever misjudging the needs of tomorrow.

Kraft Heinz

The company cited the need for acquisitions last week as it said it would consolidate its headquarters in Rotterdam, abandoning the dual nationality it has maintained since a 1930 merger of British and Dutch companies. After fending off an unwanted approach from Kraft Heinz Co. last year, it’s taking the biggest steps in the industry to future-proof its portfolio, Berenberg analysts led by James Targett wrote in a note.

While the underperforming margarine business has been sold, new additions like Blueair still account for only a tiny fraction of sales. Unilever shares have trimmed gains to 15 percent since Kraft Heinz’s $143 billion bid, trading at 3,762 pence in London on Tuesday, down from a high of 4,558 pence in October last year.

Polman’s “sustainable living plan” adds another challenge -- earning profits from the 1 billion euros to 3 billion euros ($1.2 billion to $3.7 billion) the company spends annually on deals that align with the CEO’s vision. After organizing hand-washing campaigns and building toilets in rural Africa, the company took aim at air pollution, which contributes to more than 7 million premature deaths per year, according to the World Health Organization.

Blueair’s purifiers can sell for more than $500. Unilever has not disclosed the cost of the acquisition, but says it expects the unit’s sales to rise to more than 1 billion euros as soon as 2020 from about $200 million in 2017. The business had double-digit sales growth in its key markets of China, India and the U.S. last year, a Unilever representative said.

The company said it still sees opportunity in China, Blueair’s largest market, where penetration of air purifiers is only 5 percent. But demand is slowing there. Overall sales of purifiers last year rose 13 percent, to $2.2 billion, after nearly doubling from 2012 to 2013, according to research firm Euromonitor.

Carol Lv, a Shanghai-based analyst at the firm, expects growth in China to slow to 7 percent annually through 2022. That’s still faster than the consumer-goods industry’s overall pace.

Philips, Xiaomi

Blueair is the fourth-largest player in the Chinese market with a 5.5 percent share, trailing Royal Philips NV, which produces 1 in 10 air purifiers sold in the country. New entrants include Xiaomi Corp. and Hon Hai Precision Industry Co., better known as Foxconn.

Government initiatives to demolish coal-fired boilers and curb high-emission vehicles helped Beijing reduce the number of days of heavy pollution to 23 last year, fewer than half as many as four years earlier.

“If you think about the market for air purification, it definitely peaks when there are serious pollution episodes,” said Lauri Myllyvirta, a clean-air campaigner at Greenpeace in China. “That peak definitely hasn’t happened this year in Beijing.”

To try to spur growth, Blueair is talking to auto manufacturers to try to add its devices in cars, and considering the creation of a services arm that would install and maintain the devices in schools and hospitals. Paranjpe, the former chief of Unilever’s home-care business who this year took the helm of its food and beverage divisions, also wants to lessen Blueair’s dependence on the emerging world by challenging city dwellers in Europe and North America to think about the air they inhale.

“You can decide which kind of water you’re going to consume,” Paranjpe says. “Air, you don’t have a choice.”

©2018 Bloomberg L.P.